Enerpac Tool Group Corp (EPAC) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Actuant Corporation second-quarter conference call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Wednesday, March 19, 2014. It is now my pleasure to turn the conference over to Karen Bauer, Communications and Investor Relations Leader. Please go ahead Ms. Bauer.

Good morning and welcome to Actuant's second-quarter fiscal 2014 earnings conference call. On the call with me today are Mark Goldstein, Actuant's Chief Executive Officer; and Andy Lampereur, Chief Financial Officer. Our earnings release and the slide presentation for today's call are in available in the investor section of our website.

Before we start, a word of caution. During this call will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Investors are cautioned that forward-looking statements are inherently uncertain and that there are a number of factors that could cause actual results to differ materially from these statements. These factors are outlined in our SEC filings.

Consistent with prior quarters, we will utilize the one question, one follow-up rule in order to keep today's call to an hour. Thank you in advance for following this practice. And with that, I will the call over to Mark.

Thank you, Karen, and thanks for joining us on our second-quarter earnings call. As you know, this is my first quarterly earnings call as CEO, and I'm looking forward to working with each of you in this new role. I'm excited about our vision, our strategies, and the many opportunities that lie ahead for Actuant and our shareholders.

Turning now to the second quarter. We delivered consolidated Actuant results that were generally in line with our expectations for sales and earnings, excluding the impact of a higher-than-expected effective tax rate. Our core growth was solid, coming in at 4%.

Notably, the energy segment showed strong sequential improvement from negative 1% last quarter to positive 11% this quarter. Second-quarter EPS was $0.30, within our guidance range, but $0.02 lower than expected, due to higher taxes. We had $0.01 benefit for second-quarter stock buybacks, but this was more than offset by the combination of unfavorable segment mix and facility movement efficiencies. I'll talk later on the call about the additional actions we plan to take to combat the effect of the current economic environment.

As you read in the release this morning, we repurchased the remaining 2.6 million shares outstanding on our current buyback authorization for approximately $94 million. The Board authorized an additional 7 million share repurchase program this week so we can continue to return capital to our shareholders. We'll also get into this in more detail later on the call.

And with that overview, I'll turn the call over to Andy.

Thank you, Mark, and good morning, everyone. I'll provide a few summary level comments on our second-quarter financial results and then provide more color later. Sales for the quarter of $328 million were up 9% from a year ago and just a hair beneath our $330 million to $340 million sales guidance.

Our $0.30 a share of EPS from continuing operations was within guidance despite a higher effective tax rate than what we had forecasted and built into our guidance for the quarter. Our second-quarter operating income pretax earnings in EBITDA for all higher than a year ago. Assuming the same effective tax rate as the second quarter of last year, our current year earnings per share would have been $0.06 a share higher and EPS would have increased year over year.

Here on slide 5, I wanted to quickly review be discontinued operations section of this quarter's income statement. We completed the divestiture of the electrical segment in December and recognized the resulting gain. The gain in related sale cost as well as electrical segment results for this stub period are included in the $19 million in income and discontinued operations.

There were approximately $243 million of net proceeds from that divestiture in the second-quarter which were used to fund share buybacks and reduce net debt. We will have tax payments and other disbursements related to the electrical divestiture during the balance of the year, with the full-year net proceeds of $225 million still a good estimate.

Decoupling activities related to the divestiture such as splitting IT, payroll, and strategic sourcing functions, as well as shared facilities, are on track and will be completed by our fourth fiscal quarter.

Now, back to continuing operations in slide 6 with a discussion on sales. Second-quarter sales were approximately 9% above last year in total with 4% core growth and 5% from net M&A activity. We were pleased with the rebound in the energy segment which posted 11% core sales growth on a year-over-year basis. Engineered solutions had 7% core growth in the quarter, following the big European truck buy benefit in the first quarter. The industrial segment had a 5% year-over-year core sales decline on a tough comp and tepid demand. Following soft demand in December and January, our consolidated sales improved as the quarter progressed, in line with weather patterns.

Turning to slide 7, operating profit increased approximately $2 million on a year-over-year basis, while the corresponding margin declined 40 basis points. Unfavorable sales mix and manufacturing variances, the latter tied to several facility moves underway, weighed on year-over-year margins. From a mix standpoint, the addition of Viking, with its higher fixed cost structure, hurt energy sector margins year over year while lower sales from industrial, which is our highest margin segment, were headwinds.

During the quarter, Enerpac opened a new US facility and transitioned manufacturing from the old to the new plant. This resulted in duplicate overhead for part of the quarter, which was also the case with the consolidation of two engineered solutions facilities into existing low-cost country plants.

Despite these costs and the related inefficiencies, we were successful in improving margins in two of our three segments in the quarter. In summary, margins were okay, but not great.

Now, let's dig down one layer and discuss sales, profits, and margins by segment starting first with the industrial segment on slide 8. Industrial reported 5% overall and core sales declined in the second quarter, reflecting tough comps in integrated solutions from a year ago as well as sluggish North American industrials tool demand.

We discussed the IS comp headwinds on our last quarter call, and that continued into the second-quarter. Quoting activity for IS projects remains high, but project sponsors continue to be slow in pulling the trigger on awarding and starting these projects. On the base Enerpac industrial tool front, demand was soft in the quarter, especially in North America where weather conditions in our US plant were disruptive. Europe was positive on a core IT sales basis in the quarter, and Asia was okay, excluding mining markets.

Despite the sequential seasonal slowdown, lower second-quarter sales on a year-over-year basis, and facility related headwinds, margins increased due to aggressive cost management and favorable segment sales mix. We exited the quarter at a much better sales and order pace than in December and January and are optimistic that the worst is behind us.

Moving on now to the energies segment on slide 9, overall segment sales increased over 30% as a result of 11% core growth and the benefit of the Viking acquisition. Both Cortland and Hydratight reported improved shipments on a year-over-year basis, and they had booked several large orders that bode well for the future.

Energy segment operating margins were a big focus on our first-quarter earnings call. We predicted that second-quarter margins would be roughly similar to those that we reported in the first quarter despite the normal seasonal drop sequentially. Actual second-quarter operating profit margin increased sequentially this year by 70 basis points, compared to a seasonal 500 basis point decline from the first to second-quarter a year ago.

While our year-over-year second-quarter (technical difficulty)

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Sorry about the interruption. I'll start over on the energies segment. I'm on slide 9. Overall segment sales increased over 30% as a result of 11% core growth and the benefit of the Viking acquisition. Both Cortland and Hydratight reported improved shipments and booked several large orders during the quarter that bode well for the future Energy segment operating margins were a big focus in our first-quarter earnings call. We predicted that second-quarter margins would be roughly similar to those in the first quarter, despite normal seasonal drought.

Our actual second-quarter operating profit margin increased sequentially this year by 70 basis points, compared to a normal seasonal decline. Last year was a 500 basis point decline from first-quarter to second-quarters. While our second-quarter margins did decline year-over-year by 300 basis points, almost all of this was attributable to the Viking mix, with a combined Hydratight and Cortland results and margins in line with last year. We still have work to do on the margin front in energy going forward. But we had a big move this quarter, and we're optimistic things will continue to improve.

Before moving on to engineered solutions, a few words about Viking SeaTech. Last quarter, we commented that Viking had some mobilizations move to the right and quotes that project sponsors were dragging their feet on. Vikings revenues in the second quarter were roughly in line with the first quarter and had better margins. During the quarter Viking mobilized the multiyear [Wheatstone] job and booked another $9 million order that will mobilize early in the fourth quarter. While we're not where we would like to be, we are seeing progress.

Moving on now to slide 10, I'll cover engineered solutions, which was again a strong performer in the quarter. Total segment sales increased 6%, consisting of 7% core and 1% divestiture headwind. We again saw solid core growth in global truck, RV, and agriculture, while global mining and off-highway equipment markets continued to be challenging. Operating profit margins for the segment increased 50 basis points year-over-year on volume. This took place despite headwinds from multiple facility moves. We expect continued growth in this segment in future quarters, albeit at more modest levels as we have cleared the benefit of the European truck pre-buy. So, that's it for my comments this morning on the P&L period. Now, I'll provide some color on our cash flow and capitalization.

Our second-quarter cash flow from operations was down on account of a working capital build and higher capital expenditures. A portion of the working capital build reflected the core sales growth and the build of inventory safety stock for the various facility moves we discussed. It was an eventful quarter with the completion of the electrical divestiture. We spent about $94 million of those proceeds on stock buybacks and used the rest to retire borrowings on our revolver and add to our cash balances.

Our quarter-end net debt to EBITDA ratio was 0.9 times, and we had $150 million of cash on the balance sheet and our entire $600 million revolver undrawn. Our balance sheet has never been in better shape, and we are well-positioned to deploy funds and acquisitions and additional share buybacks, which Mark will review shortly. That's it for my portion of prepared comments today. I'll turn the call back over to Mark.

Thanks, Andy. Despite economic conditions, I was encouraged by some of the commercial wins and developments in the quarter. Pointing you to slide 12, I want to first cover some recent events to give you an idea of how we are commercializing growth and innovation and capitalizing on the macro growth themes.

We presented some of our key new products and technologies at the recent ConExpo tradeshow, which is the major construction show that takes place in Las Vegas once every three years. Enerpac changed it up a bit this year at the show and moved from a traditional indoor booth to an area outside the convention center in order to showcase some of the big projects and actually demonstrate some of the technology it has to offer with our integrated solutions business.

The Vegas High Roller, a Ferris wheel as only Las Vegas can build them was highlighted and visible on the Las Vegas skyline. We were involved in its construction and, at one point, holding in place some 750 tons of steel as additional sections were added to its radius. We also designed and produced the emergency braking and evacuation system. Interestingly, the Ferris wheel is bigger than the London Eye, has 28 cabins that carry 40 people each, and takes a half hour to make one rotation.

Also highlighted was the ESET -- or Enerpac self-erecting tower. A photo of that is on the bottom of the second-quarter highlight page -- slide on page 3. This product provides an alternative to a traditional crane that can be assembled and utilized the various heights. This type of tower, along with a standard gantry cranes, synchronous lifting systems, and custom products with similar capabilities were all highlighted at the show and demonstrate the breadth of the Enerpac Integrated Solutions product offering. We believe we made a big impact with this outdoor booth, which generated leads for many potential customers who were not aware of our heavy lift capabilities.

In addition, our Maximatecc business had an indoor booth at the show which highlighted safety and control features available in their custom design displays and controllers for big equipment in the construction space.

Next, I want to review capital allocation as you see here on slide 13. As you read in today's press release, we were more aggressive this past quarter with the stock buybacks, repurchasing the remaining 2.6 million shares under our prior buyback authorization. We want to continue to do what we've been doing over the past three years -- deploying capital and acquisitions and returning capital to shareholders via opportunistic buybacks.

Our continued robust cash flow generation and current strong balance sheet gave the Board confidence to approve another 7 million share authorization. Share buybacks are the preferred way for Actuant to return capital shareholders because of the flexibility they provide to turn on and off, should a sizable acquisition take place. But let me be very clear, this does not mean that we have changed our priorities for capital allocation. Growth, both organically and through acquisitions, continues to be the number one priority for capital deployment.

Lastly, I wanted to provide an update on M&A, which is quite active and spans all three segments. The funnel contains deals of various sizes, but the majority are considered tuck-in in nature and size, with the quality in strategic fit of the deals very tight. We continue to maintain financial discipline in M&A. We passed on some larger deals with pretty high valuation expectations in the quarter, but there are several others in the pipeline that are financially attractive. We are optimistic that we will complete acquisitions over the next couple of quarters.

That's a good segue into talking about the back half of fiscal 2014. At just past the midway of the fiscal year, we have reported earnings for the first two quarters that were within our guidance range. Core sales growth for both quarters has been within our 3% to 5% full-year target as well. However, it has taken a lot awful lot of cost management, stick handling, and effort to deliver those results given the current tepid economic conditions.

Frankly, we and probably (technical difficulty)

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Ladies and gentlemen, thank you for your patience. Your conference will now resume.

Sorry about that. I'm going to start on slide 14, under the guidance. That's a good segue into talking about the back half of fiscal 2014. At just past the midpoint of the fiscal year, we have reported earnings for the first two quarters that were within our guidance range. Core sales growth for both quarters has been within our 3% to 5% full-year target as well. However it has taken an awful lot of cost management, stick handling, and effort to deliver these results given the current tepid economic conditions.

Frankly, we, and probably you as well, expected the economy to have shown more signs of life that it has. This has led us to double down on some of our quiet restructuring actions in order to better position the Company to deliver on our financial commitments. Examples include consolidating a few more facilities than originally planned, accelerating ERP system implementations and conversions as well as other actions to increase cost savings. One of the ultimate goals of these self-help actions is to reduce costs in some areas so the savings can be reinvested in more customer-facing activities. These actions create short-term headwinds as we recognize the costs and incur the potential disruptions associated with them just as we experienced in the second quarter, but will create long-term growth and are the right thing to do.

One of the things that has changed from our original guidance is growth by segment. As you can see here on slide 15, we are now forecasting more core growth from the energy segment and less from the industrial segment. This is simply a reflection of what we saw in the first half versus prior expectations. Engineered solutions will continue to be the highest core growth segment, now at 7% to 8% for the year compared to our prior 6% to 8% assumption. We have lowered our outlook for industrial from 3% to 5% core growth to 0% to negative 2%, based on the weak first half. And finally, we've increase the energy segment outlook from 1% to 3% core to 3% to 5% core growth.

In total, no change to our consolidated 3% to 5% core growth expectation, just movement within the segments, which does put a little more pressure on margins due to less favorable sales mix.

Despite these factors, our overall guidance ranges for the full year are not changing. Given our year-to-date results, the anticipated shift in mix, and the costs for additional actions previously discussed, however, we think it is more likely that we will be at the lower end of our $2.00 to $2.10 EPS range. We are comfortable we will be within our sales range, and we have a high confidence level of delivering the targeted $190 million of free cash flow for the year.

Our third-quarter outlook includes sales in the $370 million to $380 million range and EPS between $0.60 and $0.65 a share. As has been the case all year long, our effective tax rate will be lumpy in the back half of the year and in the third quarter in particular we are expecting an effective tax rate in the low teens. We are laser focused on delivering fiscal 2014 results in line with our commitments, and we will continue to identify self-help actions that will provide a long-term value to shareholders.

That wraps up our prepared remarks, so, Kim, please open up the line for questions.

Thank you. (Operator Instructions).

Jeff Hammond, KeyBanc Capital Markets.

I just wanted to zero in on Viking. One, can you give us a sense of how your thinking about the second half because I think it was going to be back half weighted. And Andy I think you made some kind of encouraging comments, but on the same side, maybe saying it was not where you wanted it. And maybe within the context of all of that it seems like we are hearing more negative news on kind of offshore oil and gas. How does that all play into how you are thinking about Viking?

All right, Andy, why don't I cover some high-level stuff and then you can follow up after me. As you know, Jeff, we've got a fairly fixed cost structure with Viking. And in addition, we've got a $5 million retention agreement expense for this year, so we are working against that. And in the first six months we talked a little bit about the deferral of some larger jobs, mainly that Wheatstone job that we are seeing come through right now as well as a new $9 million job for Gorgon that we are very excited about. So, we feel comfortable that that revenue is going to be coming in.

In the meantime we've been looking at the cost side of things as well to make sure that we've got a good balance there. We are reprioritizing the growth initiatives that the team had. We've seen improved quote conversion in general. We're executing some consolidations that came out of the integration action items in Norway, and we just executed on a sourcing savings using AGS to purchase some chain which is helping on the margin piece. And certainly leveraging assets between Norway and the UK. So there's a lot of things that we are working on.

We are not assuming that the volume is going to come in to the initial projections, so we are working on the cost side as well. So with that, Andy, why don't you fill in some of the details?

Yes. From a revenues standpoint, second quarter, as I mentioned, it was pretty similar to the first quarter. We are going to see a little bit of a step up in Q3. In our outlook, we have a pretty nice ramp from Q3 to Q4 on sales as this second job that we won really kicks in in the fourth quarter, adding about $1 million a month to revenue and high margins with it.

When we were on last quarter's call, I think we were looking at $95 million to $100 million of solid revenue for this business. We've ratcheted that back to $85 million to $90 million in the current outlook. So as one of the factors we were looking at guidance for the balance of the year. So there is a pretty healthy ramp in the fourth quarter in it and with it margins. So that's kind of implicit, what's in our guidance.

I would say one other comment, and Mark and I were talking about this before the call. We certainly have been reading a lot of -- rely on the newspaper -- about bad news, or not the greatest news on offshore demand and spend and what not, yet we've had them really nice orders in the last 90 days in the Cortland business, which does a lot offshore as well -- or all offshore. So it's a bit of a mixed bag.

One thing we've learned about the energy segment here is this clearly is lumpy. I mean it can turn on a dime, like you saw this past quarter. It went from minus 1% core to plus 11% here. So, it is just lumpy or not as predictable as the rest of our businesses.

Okay. Good color. And then, just is there a way you can quantify what all this disruption and maybe the weather cost you in this quarter on the plant moves? And then what's your -- can you quantify kind of the additional restructuring and the impact into the back half?

On the Enerpac side of things, on the industrial side of things with the Columbus move is really hard to quantify that, Jeff. But just to put it in perspective, we wrapped up for the move in Columbus, we had some fill-rate disruptions that probably dropped are fill rate from the mid-90s down to the high 70s for a period of time. They are back up into the low 90s right now, so we've had a good recovery there. It's really hard to determine what the loss was there, and the reason is, is because due to the cycle time reduction that we've had over the years but that product line at Enerpac, a lot of our distributors order on demand. And if we don't have it in stock, they may go somewhere else. And so we just don't have it visibility to that level of detail on it.

From a weather standpoint, what we can tell you is just what we are hearing from our distributors. I think the main impact of the weather is with our Enerpac business. Distributors just had less days during the course of January and February to do the business they needed to do. I think much of that will come back in the second half, and so that's what we are seeing from that perspective. What was the second part? Restructuring.

The restructuring piece. Yes. When we look at the back half of the year, I'm looking at $4 million to $5 million of costs out there for restructuring. The first half was not that high. It was probably about $2 million, so we definitely have stepped up the expectations here. And this will just be run through our results. It is included in our outlook for the year, so that's one of the reasons why we are steering people down toward the low end of our guidance range is because of this. And the change in mix where Enerpac core sales are, the expectation is more modest than what we had previously.

Thanks, guys.

Charley Brady, BMO Capital Markets.

With respect to the energy business, you commented Hydratight saw some -- up pretty strongly in North America and Asia. I wondered if you could provide a little more detail on where the strength is coming from, a little more specifically. And I guess I'm surprised to hear that there was no weather impact on the energy business, particularly in North America. Is that's something that on the come, or is just completely unaffected by that?

Yes. So, let me give you a little color on the Hydratight side. We were up -- if you look at the Hydratight business, we were up about 4% in that business for the quarter. It was primarily North America and APAC; that's where the increase was. We've got some nuclear business they came back strong in the quarter. Our maintenance -- standard maintenance picked up. We really hadn't heard about much disruption through the energy side of the business, Charley. Most of that discussion was on the industrial side, but I'm sure there was some impact on it that we just haven't been able to quantify that piece of it.

The other piece that drove some of this on the Hydratight side was our technician utilization, which was substantially in the course of the quarter. And that rose to about the mid-80s which is very strong, especially relative to the first quarter.

All right. Thanks. That's helpful. And just so I understand, going from the back half of the year, Andy, you just talked about some more restructuring. Do we still get a little more disruption from any kind of plant movements? Or is that essentially behind us?

Good question, Charley. With regard to the industrial segment, that's done, [having them] the facility. All of the lines have been moved -- I think we are sweeping out the old plant probably this week. Within engineered solutions, there is some more to go. We've got the final line move coming out of our Creston plant. There's one line I believe that needs to move yet out of Lancaster as well. And then we have another plant in Malaysia that is going to be coming down at the end of the quarter.

So, I would expect it to be less than what you saw this past quarter in terms of the impact because we are further along in it, and there are fewer people on the closing side, if you will, the plants that are going down. But it will probably impact ES a little bit more than any segment.

Okay. And just one more then -- on the full-year tax rate --

Charley, really? You are going for a third?

It's a quick one, though. Tax rate for the full year and I'm done.

Because of the mix shift and what not you are probably looking at about 20%, so this is also a headwind relative to our prior guidance. We were down into the teens there and the mix worked against us, more income in the US which is our highest tax rate, unfortunately, country.

Thanks. Thanks, Karen.

Scott Graham, Jefferies.

So I was hoping you could give us a little bit of a bridge here on this fourth-quarter, which if I numbers are correct seems like that's going to need to be to get to the low end of guidance, a $0.60 a share-ish quarter. And we have a much higher tax rate. I'm just sort of wondering how -- what are some of the things that you think flipped decisively in the fourth quarter versus the third quarter that is going to get you there?

The biggest single item with the energy as far as Viking cranking up in the fourth quarter with Wheatstone and Gorgon coming on program, both of them coming online. The second piece would be industrial -- our assumption for core sales in both -- excuse me, in the base IT business is higher in the fourth quarter than in the third quarter as well. Energy looks pretty good right now. In the base Cortland and Hydratight business, we've got a very healthy backlog there. We picked up several orders -- big orders this past quarter period, some longer-term type stuff that we are excited about as well. So, that's one of the big changes when you look at sequentially from Q3 to Q4.

Would you also expect that the plant moves that you are involved in right now, does that start to have a payback in the fourth quarter, not the third?

Definitely. I should have called that out. Under that $5 million second half probably $4 million of that is Q3, so it's heavily slanted towards Q3.

Okay, very good.

And we'll see some of the benefits of earlier quiet restructuring in the fourth quarter.

Yes. Thank you.

Ann Duignan, JP Morgan.

I think most of my questions have already been answered after all of those. So just looking at your Enerpac, the new product that you introduce at ConExpo, can you talk about who your direct competition would be for that product? With it be would it be Demag or regular crane guys?

It's everything from Rexroth to some of the major contractors to Versabar. There's just a lot of folks that are in there. But really when you look at the gantry and the strand jack market, a piece of that is doing what a crane would typically do in a similar application or where there is low headroom or just an area where you cannot get that from a cost standpoint or from a structural standpoint -- get a crane in there. Yes, Dorman Long as well. There's a number of folks in that space that we deal with.

So you wouldn't be competing with a crane on a given application? These are for separate applications?

No. You could be, and Ann, you could be. It really depends on the environment that you are in, what the list encompasses, space that you have. It all depends. In some cases, we work very closely with the crane guys for a total solution. Mammoet is a good example. We do a lot of work with them, and they are obviously a major crane manufacturer.

Okay. That's helpful. Thank you. And then just a quick follow up on the European truck. Can you just talk about what you're seeing right now over there? The pre-buy is done. What is the impact on your business, and what are the OEMs telling you, going forward?

I would say we were pleasantly surprised in the quarter (technical difficulty)

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Okay. I'll tackle that question again that Ann had asked regarding European truck demand and pre-buy. We knew we would have some of the benefit from the pre-buy given Decembers within our second quarter here. But we were surprised that order pace kept on reasonably well for January and February, so it did not fall off like a rock like we expected it to. It's actually held in there pretty well. So I would say the general tone relative to where we were at this time three months ago is slightly positive as it relates to European truck. So that's slightly more positive.

And no concern that we yet have to see the step function drop?

Based on the production schedules that we have relative to our expectations, we are good. Certainly the revenue growth will slow down relative to the prior two quarters, but it's not negative news to what we had built into the original forecast. It's actually held in better than what we had expected.

And we are still hearing that the build is going to be flat to plus 5 during the course of the calendar year. So things seem to be hanging in there a little bit other than we expected through the first two quarters.

Okay. That's great color. I appreciate it. Thanks so much.

Rob Wertheimer, Vertical Research Partners.

Just a quick follow-up on Europe truck. Do you expect the last quarter to start to see a headwind from last year's pre-buy, or I don't know if your build schedules extend out that far, if you have any glimmerings of that yet?

Not based upon the timing of our quarters (multiple speakers).

It was probably our -- first quarter of this year when we sought any kind of benefit from pre-buy coming through. So certainly the growth -- our expectation is the growth in the fourth quarter will be less than we saw in the first two quarters of our fiscal year, but no downside I would say to what our prior guidance was.

We will anniversary that until the first quarter of next year.

I hadn't known if there was a little bit of loading, but that's perfect. Thank you. And then, just to go back to industrial and integrated solutions, I don't know -- what exactly drove the downturn? Is any of the push outs or delays feel like they can come back soon? And I don't know if you can just give a little bit more anecdotal or story color on what happened there?

One thing to consider, Rob, is be had major IS projects go off to completion over the last several quarters. that was the Novarka, which is the Chernobyl; the High Roller that we talked about in the call; and then Bay Bridge. So we have three major IS projects that have come off. And so if you look at the funnel of activity now, I'd say it's extremely robust. I think we've got a good funnel. It is taking longer to make decisions and come through to completion through that funnel. A lot of the focus has been on some of the, I'd say, meat-and-potatoes integrated solutions, which is the gantry and strand jack and sync lift systems that are between 50,000 and 200,000. And so, that's been the focus of the team, but we do have a good funnel of activity going on. We are starting to see some of those come down, which will shift the later in the year.

Just to provide a little color on the mix here, when you are looking at our 5% down this past quarter in industrial, the base IT, which is the most profitable part of the segment, what most people associate with Enerpac -- our core was down less than 4%. What you seeing, as Mark said, is the integrated solutions coming off much more significantly, down about 10% in the first half of this year. And given the timing of the big project last year, I expect it to be off -- those IS projects, to be off 15% in the back after the year on a year-over-year basis, but expect the IT portion of it to come back because of -- we are seeing better order patterns right now and no disruption from weather and the facility move.

Thank you.

Allison Poliniak, Wells Fargo.

Just going back to the energy, it sounds like we are expecting, obviously, sequential improvement in margins. How should we be thinking about that? It sounds like we could get a nice lift in Q4 with Viking coming back.

You are correct. We should get -- the vines should build between third quarter and fourth quarter. Viking should be coming on stronger through the third quarter, and so that's what we've got in our estimates is that that will build at the rest of the year progresses.

Okay. And then, as well, just turning to the industrial side. IS, it sounds like things are slow to kick in there. Should we assume this sort of mix as we move through the back half of the year at this point in terms of margins?

Pretty much in line with what we said. Maybe a hair a bit more headwind from IS than you saw the first half.

Okay. Perfect. Thanks.

Ajay Kejriwal, SBR.

So just following up on the energy margins question a little bit, historically you have had a very nice pickup in the second half -- 19%, 20% margins. And I know you've talked about a couple things here -- Viking is in the mix. Just maybe some color on how to think about second-half margins in energy.

Sure. When I look at fiscal 2012, the uplift from quarter two to quarter three was about 350 basis points. We saw actually over 600 basis points lift in fiscal 2013 from that movement -- I'm talking EBITDA margins here. And we are expecting somewhere in between those two from the list from quarter two to quarter three of this year. So, pretty similar seasonal patterns coming off the bottom in Q2 to Q3 and of course the big driver there is Hydratight and the service technicians in particular coming through. So, I would expect to see a similar trend to what we have seen in each of the last couple of years.

In terms of the operating margins, is it like 700 or 800 basis points that we saw last year, sequential improvement third-quarter over 2Q?

I don't have that much built in in OP margins that much of a lift. Last year it was, like you said, 700 or 800 basis points. I don't have as much as last year built in at the OP line. It's not that high. At the EBITDA line looking sequentially, up 600 basis points or so.

And then additional built-up ramp up in the fourth quarter or do you then flatten out?

Yes. Correct. Definitely.

In 2013, they were flat. Q3 to Q4, we have a build in margins in three to four this year.

And then, Mark, maybe talk a little bit about acquisitions just in general -- maybe philosophy here, if you will, please. I know you said the pipeline is active and all. Maybe talk about how you think about offsetting the dilution from electrical. I know you have paid down some debt, but sounds like that's more opportunistic. Just talk about the size of deals and what we should expect in the next year or so.

Sure. From a deployment of capital standpoint, as I talked about in the prepared remarks, our main focus is obviously on M&A and core growth. And this additional authorization for repurchase that we have an additional 7 million shares gives us that third lever if we need it, and we will use that opportunistically.

Going to the M&A funnel, I think the funnel is very strong right now. We've got businesses that we are looking at in each one of the segments. There's a little bit of a line of demarcation I would tell you that for those assets that are larger than $100 million, $125 million that are more in public auctions, those are going for higher multiples as the smaller tuck-in acquisitions that we have had in the past and that we continue to look at. So, I think we've really -- we've narrowed the fairway on the tuck-ins. We've got some good opportunities that are out there that we feel we will close over the next couple of quarters. And we have passed on the couple of larger deals when the valuations just got beyond where we felt comfortable.

Got it. Thank you.

Matt McConnell, Citi Research.

Could you guys try to put that $2.6 million of share buybacks into context? And I know the methodology is to be opportunistic there, but the stock is still around that level of maybe a buck or two below. So is this still an area where you feel like you can be opportunistic over the next few quarters?

Sure. Definitely. If you take a look at that first authorization, Matt, if you take a look at what our average price was on that I think it was around $30 -- somewhere in that vicinity. So, and again, this is not something that we are looking at on a quarter-over-quarter basis, we are looking at it from a long-term standpoint. But, yes, we feel like we can continue to be opportunistic out there, and we will continue to do so.

Okay. Great. Thanks. And on cash flow, Andy, a little bit light in the second quarter. I know there was a lot of inventory with that related to the manufacturing adjustments you are making. And when do you think that inventory would kind of bleed down?

That certainly was a contributing factor to it. And you know receivables are up as well because of the core sales growth on it. We probably added about $5 million of inventory related to these moves. I would expect that to bleed out in this next quarter. I am not concerned at all about hitting the 190 for the year -- the $190 million of free cash flow. We always have a relatively light first half from a cash flow standpoint and then it comes pounding in in the second half, and I expect this year to be no exception to that.

Okay. Great. Thanks very much.

Jamie Sullivan, RBC Capital Markets.

A question on industrials -- just the change in the guidance for the year, just to make sure I'm understanding the puts and takes there. So the biggest impacts is really integrated solutions and the timing of projects as those played out in addition to the impact of the first half results in industrial tools, thus far? Is that the right way to think about it?

Yes. There's two different pieces. I would say our full-year outlook for IS has probably come off about 10 million bucks from when we last talked and as well as IT, given the light quarter we had this past quarter. We took the expectations down there as well. So, it is both areas but the bigger of the two is definitely IS.

I think the other thing to keep in mind, Jamie, is through the second quarter we had sequential improvements in sales within industrial, as well, combining both IT and IS. So, that's -- we've seen that over the last several months.

Right. Okay. That's helpful. And then, second question, just on energy, maybe you can talk about what you're seeing on the pricing side given some of the mix trends that are out there in the offshore market. How is pricing holding up? What are you seeing on that front?

Yes. I think I'd say it's business as usual, from a pricing standpoint. I think that as things tighten up a little bit there's a tendency to have pressure on pricing. The team is working to make sure the margins contributed to those sales are where they need to be. But I'm not hearing a lot more rumbling than we normally hear around pricing.

Thank you.

James Kawai, SunTrust Robinson Humphrey.

Great. Thanks for taking my question. My question is regarding the fourth-quarter ramp in energy, specifically the Viking, Wheatstone, and Gorgon projects that you won. Can you characterize the risk relative to timing? Is it purely an execution issue at this point and under your control? Are there some sort of exogenous factors with the client that may skew the timing forward or backward there?

From the Wheatstone perspective, we've already begun shipping that. It's mobilized, and so that will continue to proceed. The Gorgon -- the $9 million Gorgon order is scheduled to begin shipping in the third quarter, and so we will see that wrapping up ramping up. So from our perspective right now, we feel very good about those ramp ups.

Things definitely can move around, though. From a risk standpoint, if the customer -- I mean we are just one of multiple parties involved in the process. If they decide to move it out, to the right, it's totally outside of our control. We are at -- based on their own schedules.

And the two examples are the ones we just talked about. Wheatstone is, as we talked about last quarter and this quarter, pushed out. The Gorgon one got dropped in early. So these can move around, but with our visibility right now, this is our best estimate.

Great. That's helpful. And then on the Viking, it's still a little bit new to us. I just want to understand the tail to some of this business. I think it was characterized as more rental and lease, which kind of implies that there is possibly a multiyear tail to some of this. So should we look at this as kind of a step up in the run rate off the fourth-quarter or more of kind of a lumpy revenue stream?

It is expected to be a step up; there's no question on that. The Wheatstone contract is a multiyear contract, three years, actually. Gorgon will span this year and next year but it's not going to go beyond 12 months. It's a mixture of the two.

Got you. Thank you very much.

It is a bit of a ramp.

Stanley Elliot, Stifel.

Thank you. My questions have been answered.

Mig Dobre, RW Baird.

Good morning, everyone. This is Joe Grabowski sitting in for Mig. I guess I had a similar questions at the last one, but on the several large orders in Cortland and Hydratight it sounds like the revenue from those orders are going to benefit the fourth quarter, but what's the tail on those projects? And how do the revenues kind of flow beyond fiscal year 2014?

One of them is a three-year project that will be probably $1 million a quarter or so -- excuse me, $1 million a month when it starts. And the other ones in there will definitely stretch this year and into next year into the middle of next year. On those are some service jobs, and there's some product to delivery that's spread over a 12 month period.

Yes. Let me just add some color on that Hydratight order. Andy had mentioned it. But the asset integrity order that we are talking about, it's a big contract. It's a Gorgon-like contract for asset integrity. And so that's going to be out there for probably a three-year period. It will ramp up, as Andy said, to about $1 million per month, and that was a contract that was recently executed over the last several weeks. So that's going to be with us for several years.

Okay. Great. Thanks for the color. And then a quick follow-up on that -- you had a change in leadership in the energy segment after the last call. And I was just hoping to get some color about Brian's approach to the business and what he's doing to improve execution and how projects are being quoted.

It's a great question. As many of you know, Brian has been with us for about 20 years. He was in the energy segment up until several years ago. He really took over energy and Hydratight when we first purchased the business. So he understands energy very, very well. He takes a much more methodical approach, very process oriented. And we have seen a lot of improvements in the areas we can control in a short period of time. We talked a little bit about the technician utilization, but part of that is just the quoting process, the visibility of the process, and the funnel, and the conversion rates. Part of it is technician turnover in really solidifying that team. Another piece is on the forecasting and estimation of pricing on these major deals. And the third piece is asset optimization.

And so, he's really taken a very process-oriented approach to this and the team is has really embraced it. It's been very helpful in getting our hands around those controllable areas.

Great. Thank you and good luck.

Daniel Holland, Morningstar.

Just a quick question on the industrial segment. Just thinking longer term on the margin front, right now margins are kind of up in the stratosphere where they haven't been since 2007, 2008 for the last few quarters now. I'm trying to think of what are some of the things that you guys have done to protect the sustainability of those margins and how we can think about those going off the next few years here.

You know when we look at margins -- last year within industrial, and I'm looking at EBITDA margins here, the back half of the year we were 30% or north of that. We actually expect to see at slightly higher margins in the back half of this year in that business, primarily the result of mix, with less IS and more IT mix in there, as well. Some savings that are going on within the business as far as manufacturing some new products, our brand-new plant, efficiencies from that as well. So I would expect this business to operate north of 30%, given its present mix of heavier on IT and lighter on IS. So 30%, 31%, 32% type margins when we look out.

From a sustainability standpoint, there's a number of areas that we are focused on. First is new-product development, really focusing on voice of the customer as well as vertical market approach. Mining is an area that we've been focusing on. Power gen is another one. The other piece is standardizing some of the IS products -- the gantries, the sync lifts. And really improving efficiencies, productivity, and enabling our total global sales force to sell those solutions versus a small cadre of people that we have done in the past.

So a lot of money has been invested in the front end of his business over the past year or so, and we will continue -- the goal here is not to continue to build those margins. It's to reinvest those profits back into the business so that we can make sure that it's a sustainable model.

Great. That's very helpful. Thank you.

Scott Graham, Jefferies.

I just wanted to ask a little bit more about the engineered solutions business, which I'm sure you guys agree still is kind of operating at an upper single-digit margin, is really well below what we've seen in the past. Do you expect to kind of get up and over 10% operating margin and maybe even higher than that in next fiscal year? Should that number be kind of may be more likely 12 type of number?

I'm not asking you -- well I guess I am -- asking you a little bit about 2015 here, but I was just -- this margin has been depressed for a while. You've done some things in the business on the facilities side. It just seems that that margin with any kind of top-line growth should kind of get back to what we've seen in the past. Is there any reason to believe otherwise?

So, Scott, if you take a look at what we've been doing with these quiet restructurings which have been going on over the past year, if you take a look at the focus on new products we've cited -- add cedar platform and some of the new business that's coming in at higher margins. The intent is to continue to move that margin in that direction, and so there's nothing that would indicate anything otherwise at this stage.

Okay. That was really my only other one. Thanks.

Jeff Hammond, KeyBanc Capital Markets.

Maybe I missed this, but can you give us what you think the share count is going to be based on the buyback and what the ending share count was for the quarter?

On a fully diluted basis, I think at quarter end if you look at January, I think we were just a hair under $73 million, including options and that sort of stuff.

So we should think of kind of a 73 in the back half of the year, assuming no new buyback?

Yes. I would even steer you up a little bit. The reason for that is there will be option exercises in the back half. There are some options that expire this fall. I think Arzbaecher, I believe, still has some out there that will probably be lightened up on as well. And there's performance shares later on in the year, that sort of stuff. Just the pricing obviously you know how the diluted share calculation works. If stock price moves around, it is going to impact the shares outstanding calculation as well.

Okay. Thanks, guys.

And there are no further questions at this time. I'll now turn the call back to you for closing remarks.

Great. Thanks for joining our call today. I apologize for the various disruptions we had here. They were not on our end, but sorry about all of that getting cut off here. We will be around all day to answer follow-up questions you have. Third-quarter call will be held on June 18, and we have tentatively set our investor day for October 7, so mark your calendar for that. Thank you. Have a great day.

Thank you.

Ladies and gentlemen, that does include the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a good day, everyone.